Since the late 1960s a number of techniques have been developed for displaying a diversified firm‘s operations as a “portfolio” of busi-nesses. These techniques provide simple frameworks for charting or categorizing the different businesses in a firm‘s portfolio and deter-mining the implications for resource allocation. Techniques for portfolio analysis have their greatest applicability in developing strategy at the corporate level and in aiding in corporate review of business units, rather than in developing competitive strategy in indi-vidual industries. Nevertheless, if their limitations are understood, these techniques can play a part in answering some of the questions in competitor analysis raised in Chapter 3, particularly if a firm is competing with a diversified rival who uses them in its strategic plan-ning.
There have been many written accounts of the most-used tech-niques for portfolio analysis, and an extensive discussion of their mechanics will not be presented here. ‘ Rather the focus will be on out-lining the key elements of the two most commonly used techniques— the growth/share matrix identified with the Boston Consulting Group (BCG) and the company position/industry attractiveness screen identified with GE and McKinsey—and discussing their use in competitor analysis.
1. The Growth/Share Matrix
The growth/share matrix is based on the use of industry growth and relative market share2 as proxies for (1) the competitive position of a firm’s business unit in its industry and (2) the resulting net cash flow required to operate the business unit. This formula reflects the underlying assumption that the experience curve (discussed in Chap-ter 1) is operating and that the firm with the largest relative share will thereby be the lowest cost producer.
These premises lead to a portfolio chart like that shown in Fig-ure A-l, on which each of a firm’s business units can be plotted. Al–though the cut–offs in terms of growth and relative market share are arbitrary, the growth/share portfolio chart is usually divided into four quadrants. The key idea is that business units located in each of these four quadrants will be in fundamentally different cash flow positions and should be managed differently, which leads to some im-plications for how the firm should try to build its overall portfolio.
FIGURE A-1. Growth/Share Matrix
- Cash Cows: Businesses with high relative share in low-growth markets will produce healthy cash flow, which can be used to fund other, developing businesses.
- Dogs: Businesses with low relative share in low-growth mar-kets will often be modest cash use They will be cash traps because of their weak competitive position.
- Stars: Businesses with high relative share in high-growth mar-kets usually will require large amounts of cash to sustain growth but have a strong market position that will yield high reported profit They may be nearly in cash balance.
- Question Marks (sometimes called wildcats): Businesses with low relative share in rapidly growing markets require large cash inflows to finance growth and are weak cash generators because of their poor competitive position.
Following the logic of the growth/share portfolio, cash cows become the financiers of other developing businesses in the firm. Ideally, cash cows are used to make question marks into stars. Since doing so requires a great deal of capital to keep up with rapid growth as well as to build market share, the decision about which question marks to build into stars becomes a key strategic one. Once a star, a business eventually becomes a cash cow as its market growth slows. Question marks that are not chosen for investment should be har-vested (managed to generate cash) until they become dogs. Dogs should either be harvested or divested from the portfolio. A firm should manage its portfolio, according to BCG, so that this desir-able sequence occurs and so that the portfolio is in cash balance.
LIMITATIONS
The applicability of the portfolio model depends on a number of conditions, some of the most important of which are summarized below:
- The market has been defined properly to account for impor-tant shared experience and other interdependencies with other markets. This is often a subtle problem requiring a great deal of analysis.
- The structure of the industry (Chapter 1) and within the in-dustry (Chapter 7) are such that relative market share is a good proxy for competitive position and relative cost This is often not true.
- Market growth is a good proxy for required cash investment. Yet profits (and cash flow) depend on a lot of other things.
USE IN COMPETITOR ANALYSIS
In view of these conditions, the growth/share matrix by itself is not very useful in determining strategy for a particular business. A great deal of analysis of the sort described in this book is necessary in order to determine the competitive position of a business unit, and to translate this competitive position into a concrete strategy.3 Once this front-end analysis has been done, the value added of the port-folio plot itself is low.
However, the growth/share matrix can be one component of a competitor analysis when combined with the other kinds of analysis described in Chapter 3. A firm can plot, as best it can, the corporate portfolio for each of its significant competitors, ideally at several points in time. The portfolio position of the business unit against which the firm competes will give some indications about the ques-tions raised in Chapter 3 and about the goals the competitor’s parent may be expecting it to meet and its vulnerability to various types of strategic moves. For example, a business being harvested may be vulnerable to attacks on its market share. The comparison of com-petitors’ portfolios over time can identify even more clearly shifts in the position of a competitor’s business unit relative to others in its company, and it can provide further clues about the strategic man-date being given to the competitor. If the competitor is known to use the growth/share portfolio approach in planning, the predictive power of portfolio analysis is all the greater. However, even if a competitor does not formally-use the technique, the logic of the need for broad allocation of resources may mean that the portfolio pro-vides useful clues.
2. The Company Position/Industry Attractiveness Screen
Another technique is the three-by-three matrix variously attrib-uted to General Electric, McKinsey and Company, and Shell. One representative variation of this technique is shown in Figure A-2. The two axes in this approach are the attractiveness of the industry and the strength, or competitive position, of the business unit. Where a particular business unit falls along these axes is determined by an analysis of that particular unit and its industry, using criteria like those listed in Figure A-2. Depending on where a unit falls on the matrix, its broad strategic mandate is either to invest capital to build position, to hold by balancing cash generation and selective cash use, or to harvest or divest. Expected shifts in industry attrac-tiveness or company position lead to the need to reassess strategy. A firm can plot its portfolio of businesses on such a matrix to insure that the appropriate allocation of resources is made. The firm can also try to balance the portfolio in terms of its mix of developing and developed businesses and the internal consistency of cash generation and cash use.
FIGURE A-2. Company Position/Industry Attractiveness Screen
The company position/industry attractiveness screen is less pre-cisely quantifiable than the growth/share approach, requiring inher-ently subjective judgments about where a particular business unit should be plotted. It is often criticized for being more vulnerable to manipulation. As a result, sometimes quantitative weighting schemes, using criteria determined to lead to industry attractiveness or company position in the particular industry, are employed to make the analysis more “objective.” The screening technique re-flects the assumption that every business unit is different and re-quires its own analysis of competitive position and industry attrac-tiveness. As noted above, actually constructing the growth/share portfolio in practice involves the same type of particularistic analysis of each business unit. Hence its actual “objectivity” may really not be far from that of the company position/industry attractiveness screen.
Like the growth/share portfolio matrix, the company posi-tion/industry attractiveness screen offers little but a basic consis-tency check in formulating competitive strategy for a particular in-dustry. The real issues involve deciding where to plot the business on the grid, deciding if position on the grid implies the indicated strat-egy and working out a detailed strategic concept for building, hold-ing, or harvesting. These steps require the sort of detailed analysis described in this book, because the criteria listed in Figure A-2 are far from sufficient to determine industry attractiveness, company position, or the appropriate strategy. It is difficult to see, for exam-ple, how the screen could lead to a recommendation to invest in a de-clining industry, sound advice in some situations as discussed in Chapter 12.
Yet the screen can play a part in competitor analysis, in much the same way as the growth/share matrix can. It can be used to con-struct competitors’ portfolios at different points in time and to gain some insight into what strategic mandate a competitor’s business unit may be receiving from its corporate office. Whether to use the growth/share or company position/industry attractiveness tech-nique is largely a matter of taste (basically the same analysis is re-quired to use either of the techniques properly), unless a competitor is known to use one or the other. In the latter case the best predictive power is gained from the technique the competitor itself uses. Note that the growth/share technique is inextricably tied with the experi-ence curve concept. Hence if a competitor is known to be strongly in-fluenced by the experience curve concept, the growth/share port-folio approach will probably be a better predictor of its goals and behavior.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.